Tobacco Bonds

Tobacco Bonds: High Yield, High Risk by Larry Levitz (8/30/2010)

Because tobacco bonds are usually issued as tax-exempt securities and proceeds are used for general government purposes, they are classified as municipal bonds.  The first tobacco bonds, a New York City sponsored transaction, were sold in 1999 at a total issuance approximating $55 billion.  However, investors should be aware that most tobacco bonds are not backed by governmental funds, but rely solely on contractual payments from cigarette manufacturers for repayment. As such, tobacco bonds contain risks characteristic of corporate debt with added concerns such as the investment risk of cigarette consumption declines and ongoing litigation.  Investors attracted to the high yields offered by tobacco bonds should be thoroughly aware of the dangers associated with them.  Recent events have only served to underscore those risks. 

This article will review the key provisions of the MSA and its impact upon tobacco settlement receipts payments, discuss how tobacco bonds are structured, and analyze how recent developments are raising concerns about the future prospects of tobacco bonds.

Larry Levitz is a contributor to Muni Market Update. The opinions expressed are his own.

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